The latest thinking on the cult of equity, and the notion of equity risk premium (ERP)1 in today's environment of artificially suppressed interest rates.

And, in the context of those findings, which asset classes different investor groups are likely to favor over the next three years.

With regard to ERP, the report suggests that it would be imprudent to put too much faith in ERP as a predictive tool since the normal notion of a “risk-free” asset no longer holds. According to the report, two of three respondents expect ERP to normalize when interest rates normalize.

When it comes to asset allocation over the next three years, one common thread across all investors will be the “bondification” of equities, according to the report. This means that investors will favor quality companies with defensive features like good dividends, less debt, strong pricing power, free cash flow, and higher return-on-equity. Stock selection will be just as important as asset allocation, if not more.

Investing is about making the most of whatever works in the surreal world of near-zero interest rates. Along those lines the report explores the following preferred segment choices and strategies among investors in the coming years:

DB plans will deploy different asset classes to target specific goals with public plans the most likely to increase their equity allocations and private plans resorting to dynamic LDI glide paths.

DC plans will continue to migrate to advice-embedded options that favor equities.

Retail investors will also favor advice-embedded options, including multi-asset class funds and funds with an income focus.

High-net-worth investors will seek uncorrelated absolute returns and globally will favor an eclectic mix of mainstream and alternative investing/active and passive investing.

Research Questions and Interviews

The 2015 research report addresses these critical questions:

Is the cult of equities dying?

What will happen to the current high equity risk premium over the next three years?

What positive/negative factors will drive asset prices in global markets?

Which asset classes and investment vehicles are different investor groups likely to favor?

Fast Facts

The key theme from this year’s research study is pragmatism, according to 65% of those interviewed.

79% of respondents do not believe the cult of equity is dying—versus 4% only who do!

Investors are worried about slower and uneven growth in the global economy (83% of respondents) and the potential fallout from the prospective rate-hike cycle in the US (55%).

Half of respondents expect the sector rotation from bonds to equities to continue. A major theme in that rotation will be the bondification of equities—the favoring of companies with defensive features, including good dividends.

Emerging market equities were chosen by respondents as the asset class likely to deliver the best annual returns (7%) over the next three years.

63% of respondents expect real estate to be the top asset class chosen by high net worth investors for medium-term asset allocation.

Principal Global Investors and The Principal Financial Group encourage you to read the full report, Pragmatism Presides, Equities and Opportunism Rise. This important research reveals over 700 industry peers’ views and insights into the most topical asset management questions in today’s investment market.

For more information please contact your representative at The Principal®

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Disclosure

1 ERP is defined as the expected return on stocks in excess of a risk-free rate (usually the rate on a 10-year Treasury or 3-month Treasury Bill).